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Councils win GFC compensation appeal

Greg Roberts and Drew Cratchley

Twelve NSW local councils are free to recover $25 million in losses after a legal win over toxic financial products sold to them just before the global financial crisis (GFC).

The Federal Court dismissed an appeal by ratings agency Standard & Poor's (S&P), investment bank ABN Amro and Local Government Financial Services (LGFS) against the original judge's ruling in 2012.

The court on Friday extended Federal Court Justice Jayne Jagot's original decision to rule that each of the three defendants - S&P, ABN Amro and LGFS - were 100 per cent liable for the damages rather than only one-third each.

That more fully protects the councils if one of the parties cannot pay their share of the damages.

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Justice Jagot said in 2012 a reasonably competent ratings agency could not have rated the products in question AAA, and that the rating was misleading and deceptive to investors.

Among the affected councils are Bathurst, Parkes, Cooma, Orange, Narromine and Ryde in Sydney.

The councils bought the complex investments, called constant proportion debt obligations (CPDO) from LGFS in 2006.

The CPDOs were given a coveted AAA rating by Standard & Poor's, suggesting they were safe to invest in.

However their values plunged during the GFC because of their exposure to bad or subprime debts and the councils lost 93 cents for each invested dollar.

Piper Alderman lawyer Amanda Banton, representing the councils, said the decision was a landmark one that would change the legal landscape.

The funders of the case, Bentham IMF, are also financing a similar case in the Netherlands against ABN AMRO/RBS and S&P on behalf of 15 institutional investors.

The ratings agencies were heavily criticised during the GFC for giving positive ratings to complex debt securities that could not have been sold without their endorsements.

"This is a great win, not only for the 12 Councils but for investors generally, that should once and for all puts banks and ratings agencies on notice that they will be held accountable," Bentham IMF executive director John Walker said.

S&P released a statement criticising the ruling and saying investors should conduct their own due diligence."

"We continue to believe that it is bad policy, and inconsistent with well-established laws outside Australia, to enforce a legal duty against a party like S&P, which has no relationship with investors who use rating opinions," it said.